Reviewing Mexico's New Bank
by Elizabeth McQuerry and Marco Espinosa
ne year has passed since bank accounting standards were revised in Mexico. The new measures, known as the Mexican GAAP, or generally accepted accounting principles, impose a much greater degree of disclosure on banks than was previously required and make their balance sheets more directly comparable with those in other countries. This article looks at the scope of these new accounting standards.
The Need for GAAP
The Mexican financial system was severely debilitated by the peso devaluation in late 1994 and increasing past-due loan portfolios. The ratio of past-due loans to total loans in Mexico rose to 12.3 percent from 7.3 percent between 1993 and 1995, the first full year after the peso crisis.
Recently, the Mexican banking system has been bolstered by a series of government support efforts. So far, regulators have taken control of three banks and intervened in 10 others in a bailout estimated to cost U.S. $48 billion, or approximately 12 percent of Mexico's 1997 GDP. One of the most important aspects of these efforts is a loan purchase and recapitalization program. The program reduces the loan portfolio of commercial banks whose shareholders agree to inject new capital. This capitalization program is administered by FOBAPROA (Bank Fund for the Protection of Savings), an entity similar in principle to the Federal Deposit Insurance Corporation in the United States.
The January 1997 introduction of GAAP in Mexico represented important changes to bank balance sheets in the areas of nonperforming loans, asset valuation and measurement of the impact of inflation. It is important, however, to clarify the scope of the GAAP standards in Mexico and, in particular, the impact these rules have on evaluating total past-due loans.
Impact on Past-Due Loans
Under the new rules, the value of a past-due loan is listed as the total unpaid balance. Loans become nonperforming after a set number of payments (varying by type of loan) are missed. Also, more stringent loan-loss provisions are now in effect, and interest can no longer accumulate on the loan. Previously, only missed payments were entered as past due and the outstanding balance could still accrue interest.
Thus, the new rules greatly expanded the scope of the past-due loans category. Some independent preliminary estimates suggested that GAAP rules would substantially revise the level of overdue loans reported by the banking system. In fact, according to news reports, the president of the National Banking and Securities Commission (CNBV) had previously stated that "the past-due index of Mexican banks will rise to approximately twice its current level." Yet during the first three quarters, banking sector indicators produced under the new GAAP show only a small growth in total past-due loans ? to 12.9 percent in the first quarter of 1997 from 11.9 percent at the end of 1996 (see chart).
Past-Due Loans in the Mexican Banking Sector
(% total loans)
Source: Mexican National Banking and Securities Commission
How does one account for the discrepancies between some preliminary estimates and the actual data? Prior to 1997, past-due loan data were reported in two categories: those belonging to the banks that the CNBV had not intervened in and those in all commercial banks. At about the same time the GAAP rules were implemented, the CNBV stopped using the two-tiered system because most intervened banks were sold and the majority of their nonperforming loans "transferred" to FOBAPROA.
These developments explain how the new GAAP rules have affected the banking sector (no longer categorized into intervened and nonintervened institutions). The chart shows how overdue loans in the hands of formerly nonintervened banks doubled from 6.4 percent to 12.9 percent with the switch to GAAP accounting. A follow-up question is whether the new rules, by themselves, provide the full picture of the overall Mexican situation with nonperforming loans. The answer is no. The total evaluation of nonperforming loans in Mexico would include a breakdown of the loans transferred to FOBAPROA ? which include both performing and nonperforming loans. By some estimates, adjusting for inflation, FOBAPROA has grown nearly fourfold, from 282 million pesos at the end of 1995 to over 1 billion pesos in the third quarter of 1997.
The standards established by the Mexican GAAP have been well received and are fundamental to restructuring the country's financial sector. Isaac Volin, financial analysis director of CNBV, has correctly pointed out that when FOBAPROA takes control of a delinquent loan, liability no longer rests with the banks but has become a "sovereign risk." This article, however, suggests that a breakdown of FOBAPROA's portfolio is necessary to make a better evaluation of the past-due loan problem in Mexico overall. This situation may be clarified soon as FOBAPROA regulators hope to make public more information about the fund's portfolio in the near future.
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